This is quick guide how to start business/establish business entity in Japan.
Probitas tax will help your business success in Japan.
Establishing company/branch in Japan
When foreign companies plan to start business in Japan, business entity should be established at first. Foreign companies generally establish a business entity in Japan in one of three modes. Incorporating process is required in case of “Representative office”, “Branch office” and “Subsidiary company”.
(1)Representative office (rep office)
First, representative office is established as locations for carrying out preparatory and supplemental tasks aimed at enabling foreign companies to engage in full-scale business operations in Japan. These offices can conduct market surveys, collect information, purchase goods, and implement publicity/advertising efforts, but they are not permitted to engage in sales activities. The establishment of rep offices does not require corporate tax filing.
A rep office cannot open bank accounts or lease real estate in its own name, so agreements must be signed by the head office of the foreign company or the representative on behalf of. Please note there are many restrictions on business operations in Japan.
(2) Branch office
Branch office is one of the ways to do business operation, but it is not so popular way. Japanese branch office is a business entity that provides services in Japan decided upon the foreign company, and it is not expected to engage in independent decision making. A branch office does not have its own legal corporate status, but is deemed to be encompassed within the corporate status of the foreign company. A Japanese branch office, however, may open bank accounts (currently not easy) and lease real estate in its own name.
In addition, Legal registration is required for establishing branch in Japan, but please note the representative of branch is not treated as director under Japanese law. It means there is no need to set up the director in Japan (although in case of subsidiary as well, there is no need for Japanese resident as director).
(3) Subsidiary company
A foreign company establishing a subsidiary company in Japan must choose to establish the subsidiary company as a joint-stock corporation (Kabushiki-Kaisha (K.K.)), limited liability company (Godo-Kaisha (G.K.)). Subsidiary companies are established through legal registration. The application date for registration will also be the date of establishment, and the company may carry out business operations from that date. Subsidiary is a separate corporation from the foreign company, so the foreign company will bear the liability of an equity participant stipulated by law for all debts and credits generated by the activities of the subsidiary.
Under JP company law, non-resident can be registered as board member. However, Probitas tax recommend that at least one resident should be registered as board member, because it is easier to open bank account.
Comparison of types of business operation
It is popular to choose “subsidiary company” style. It is rear case to choose “branch” option.
Probitas tax recommend “subsidiary company” style.
Under JP tax law, capital relationship diagram is very important to calculate corporate tax liability. Probitas tax provides tax advice on reasonable capital relationship diagram in advance to save total tax due.
Please note corporate, local, and consumption taxes liability depends on the amount of paid-in capital or the amount of capital, etc. When establishing subsidiary, we need deep consideration about the amount of paid-in capital.
Visas and Status of Residence
Any foreign people who want to enter Japan must have a valid passport, which, in principle, contains a visa corresponding to his/her purpose of entry into Japan obtained in advance from a Japanese embassy. When arriving in Japan, the foreign people must then be screened by, and receive a landing permission stamp from an immigration officer, who will determine the foreign people’s status of residence and period of stay.
Probitas can provide with the service for acquisition/renewal of appropriate visa, in association with our partners.
Notifications required after legal registration
After completing the process of incorporation or establishment of a branch, the following notifications need to be filed with each tax authorities, in addition to opening bank account etc. Probitas international tax services can prepare/file these documents on behalf of.
- Notification of incorporation in case of a subsidiary corporation・・・Must file within 2 months from date of incorporation.
- Notification of acquisition of status of foreign ordinary corporation in case of a branch・・・Must file within 2 months from date of acquisition of status of foreign ordinary corporation.
- Application for approval of filing a blue form tax return・・・Must file the day before the sooner of the day 3 months after incorporation or the last day of the first business year after incorporation.
- Notification of establishment of an office paying salaries・・・Must file within 1 month from starting salary payment.
As other documents needing to be filed with the tax authorities will vary according to the circumstances of a corporation, please let us know if you have any question.
- Notification of incorporation or establishment of branch, etc. Notifications of incorporation or establishment of branch, etc. must be filed with each of the prefectural and municipal authorities to which local taxes are to be paid.
Filing of tax return and payment of corporate taxes
Final tax return and tax payment
Corporations must file a final tax return for corporate tax, local corporate tax, corporate inhabitant tax, enterprise tax, and special corporate enterprise tax on their income within two months from the day following the last day of each taxable year end. Tax liability must also be paid within this period.
In some case, consumption tax (i.e., Japanese VAT) return filing is required at the same timing. Furthermore, some companies such as cost plus company, service company, 105% company and so one, have the merit for filing consumption tax return, because some of consumption tax paid may be refunded though tax return filing.
Blue form returns
A corporation may file a blue form tax return. Corporations filing blue form tax returns enjoy a variety of tax benefits. To receive approval from the tax office to file a blue form tax return, a corporation must submit the application for approval no later than the day prior to the starting day of the taxable year.
The format of corporate tax return is too complicated, even in almost all Japanese companies, the preparation of corporate tax return filing is outsourced to Japanese accounting firm.
Remittances to home country
Some of remittances made by subsidiary companies to their parent company, which is regarded as income of the parent company (e.g., payments of interest, dividend, or usage fees), requires withholding of income tax at the time of payment.
And, Japanese tax system has thin capitalization rule, so we need to check remittance made by their parent company to subsidiary, in order to avoid thin cap rule.
On the other hand, in tax treatment on the remittances made by a branch of a foreign corporation to its head office, the profits/losses from the internal transactions are to be recognized based on the presumption that the Japanese branch is a corporation which is independent from the head office. Please note that funding for opening a branch from the head office to the branch and repatriation of profit, etc. to the head office are categorized as capital transaction, and profits/losses do not occur. In addition, internal transactions are not subject to withholding income tax.
Individual tax return filing
Japanese tax system has “Year-end adjustment system”. Tax liability of office worker is calculated by the employer on behalf of the individual through its year-end adjustment system.
Individual must submit an income tax return for the income earned each year, except when tax payment procedures have been completed through year-end adjustment process, and must pay the tax owed between February 16 and March 15 of the following year. Persons whose total income does not exceed total deductions and persons who receive salary income subject to withholding tax at source (year-end adjustment) from only one payer not exceeding 20 million yen in that year and who have no other income exceeding 200,000 yen do not need to file a return basically.
Probitas supports the preparation of individual tax return, especially for expats as well.
Human Resource Management
Japan’s social security system
Japan has a universal insurance system, which everybody residing in Japan must, in principle, take part in the public health/medical insurance and pension insurance system.
Japan has four different kinds of insurance system which companies are legally obliged to take part in; all workers that meet certain criteria are covered by the insurance.
A company must enter these insurance systems when first incorporating or hiring staff/employees by submitting labor and social insurance notification forms to the relevant authorities. The company usually pays insurance premiums by deducting the portion of the premiums payable by employees/workers from their wages, and paying these together with the portion of the premiums payable by the company to the relevant authorities.
Probitas International tax services provide extensive payroll and social insurance support services for foreign and foreign-affiliated companies. We understand well the situation of those who operate their companies in Japan, and will offer the best appropriate service to them through either consulting or outsourcing.
We can help for filing the documents which is required in certain timing on behalf of companies.
Payroll (Salary calculation)
After hiring employees, company must calculate their salary in monthly basis. While payroll calculation is a task that can be done in a short period of time, the calculation of salary due and the necessary deductions is complicated. In addition, labor and social insurance laws and regulations such as the Labor Standards Act and the Act on the Collection, etc. of Insurance Premiums of Labor Insurance, and related laws and regulations such as the Income Tax Law are frequently revised, which places a considerable burden on companies to continuously comply. Probitas provides payroll service for foreign affiliated company.